After the beginning of the new millennium, Islamic economic and financial model could represent the main reference point for the international economy evolution. Notwithstanding the first approach to the study must rid from the old stereotypes which belong to the word “Islamic”, or to another common mistake as to look at the Islamic finance as a monolith because there is a big stock of different kinds.
The evolution of the Islamic economic model started in the 1970s (1975-1991) with the goal to create a competitive alternative to the conventional banking system. This model indeed would not works on the basis of interest but it would form partnership based on profit-and-loss sharing trough the traditional Islamic practice of mudaraba partnership or trusteeship finance.
Islamic Banking system, an equity investor
‘The society of charity’, this is one of the main slogan to simplify the Islamic both banking and financial system. This model is funded on some values taken from Shari ‘a, religious rules which belong to Islam. However the most significant difference between the capitalistic model and the Islamic model concern one of the prohibition stated by the Koran and so, to do not ask for the interest rate at the time of repayment. This is valid “for loans for productive activities nor for consumptive loan. Inadmissibility of interest rate automatically makes a charitable activity the flow of loans”. Maysir and Gharar are the other two prohibitions which Muslims should undergo. The Arabic word Gharar is a fairly broad concept that literally means deceit, risk, fraud, uncertainty or hazard that might led to destruction or loss. Gharar in Islam refers to any transaction of probable objects whose existence or description are not certain, due to lack of information and knowledge of the ultimate outcome of the contract or the nature and quality of the subject matter of it. The rationality behind Gharar prohibition is to ensure full consent and satisfaction to all parties involved in a contract. Full consent can only be achieved in full disclosure and transparency, through perfect knowledge from contracting parties upon counter values intended to be exchanged.
Shari ‘a, indeed, promotes the principle of profit-loss sharing between banks and entrepreneurs as an approach to encourage the spirit of brotherhood and cooperation in business relations. Mutual risk-sharing could help absorbing loss weight by sharing it equitably between all parties. Tolerable risk and uncertainties cannot exist in contractual obligations. Islam has also categorically and firmly prohibited all forms of gambling. Maysir and Qimar are the most common forms of gambling transactions, which are considered as totally inequitable in Islam. Maysir refers to the acquisition of wealth by chance, whether or not it deprives the other’s right. Qimar means the game of chance in which one gains at the cost of others. Even though, gambling consists in a form of speculation, there should not be any place for commercial operations in Islam as it is purely speculative. This is because the buyer is engaged in a transaction aimed to make profit through trading and not through dishonest appropriation of others’ property. This overlook shows how Islam institutionalization in the economy would bring few guidelines which would help to maintain the ‘global ethic’ for social development, with moderation and solidarity.
According to Shari ‘a rules, to ask for interest is compared to usury. No Interest? So how the Bank will be able to have profit? The theory is a bit more complicated.
The main theories behind the system
The distinctive trait is already in the name, indeed the main features of this combination of religious law and economy have importance especially as regards two rules: first of all the Islamic Bank, which join the Shari ‘a model, do not ask for interest fees; then those banks use to borrow money for a project that must have a clear social background utilities. These statements had ruled Muslims’ trade since the beginning, but this system could effort a boost just from the 1970s thanks to the so called “petrol-dollar” which had brought the necessary liquidity to the Islamic banks to rise.
Always concerning the interest rate, if that does not represent a big deal for the banks, it could be for the Islamic state monetary policy. One of the main economic Islamic scholars of the model based on money, Ibn Miskawayh, stated that monetary stability is necessary to give a value to the money itself, “for a State economic wealth and trade prosperity”.
Amartya Sen is another of the most important scholars who sustain the ‘ethic’ economy. He had pointed out that the Islamic finance is a successful example of Islamic ‘ethic’ where old ways for privates’ loan as zakat continue to be the fundament for a wealth sharing. Zakat is a charitable tax which is paid systematically according to the per-capita income. After all, moral philosophy and political economy do not clash if mixed, “on the contrary allows the economy to be build on basis that are acceptable to all … the true welfare, true happiness exist for all or for none. Ideal society is based on two fundamental principles: justice and solidarity”. the mechanism is simple: good Muslim must find happiness sharing a percentage of their wealth to sustain poor, an efficient application of zakat, indeed ensures a constant redistributive effect on national wealth, establishing one of the best bulwarks against social difference disaggregating force.
So that, one theory use to give value to money itself, while the other one use to consider money without any intrinsic value. Will these keywords be able to manage the crisis?
Today, during the globalization era, spiritual and material wellness cannot be considered separately. Islamic initiative for welfare are the results of the neo-liberal politics failures previously created by the Western colonialism. Islamic welfare, instead, regards mostly health and education, with zakat as main operative principle instrument. Some globalization aspects remand to neo-imperialism, cultural homologation and mistreatment to developing countries, politics that are not accepted by Muslim countries anymore, even if states such as Iran or Pakistan had brought from the West the ‘neutral’ structures.
Leader countries and International Cooperation
With Adam Smith theories, the main Western capitalistic paradigm was to focus on profit maximization, a formula that has recently been transformed into value creation for shareholders. In the modern era a new commercial model was developed: a corporate social responsibility in which companies’ managers should consider the interests of all members involved in the contract and not only shareholders’ benefits. Ethics, moral values and religious beliefs play an important role into this kind of business. As some scholars have stated, citizens can ensure the sustainable enterprise growth for a stable and bearable values’ creation. Indeed, the Islamic economy do not agree with the typical capitalistic principles belonged to Adam Smith theories. The Islamic model introduced instead a corporate social responsibility where manager should considered the benefits for all company’s members.
In any case the implication of Western interests in this area is well known, so that is also necessary to consider the presence of capitalistic model banks into all these countries. Among this overview, one important point should be considered first. The Islamic financial system is still part of the Islamic commercial banking system. Could be wrong to undervalue this specific point because of the western 2008 crisis, when the financial structure was separated from the commercial assets. It was also for this reason that was possible to suggest the Islamic financial system as a model to get forward the actual crisis.
The idea to divide into two different fields the real economy and the finance have created into the Western capitalistic system a deficit between the real capitals printed and those invested. From the beginning of the new millennium the Islamic world should look forward, the reason is not only in relation with the 2008 crisis, but above all, because of a new model of the Islamic finance, which is bringing wealth in most of the Asian or Middle Eastern countries. The islamic banking system spread along this area could be possible according to the different historical and social background which belong to each country. The first example were born in Egypt, Kuwait and Dubai. Those of Kuwait and Emirate States still represent the main reference points into an international panorama. On these examples few years later were born the Faisal Islamic Bank of Egypt (1977), the Islamic Investment Company of the Gulf (1977), the Bahrain Islamic Bank (1979) and the Iran Islamic Bank (1979). Real estate sector was the main target for most of the investments supported by the Islamic Bank, especially the Kuwait Finance House, leader of the islamic banking model which led the urban area enlargement.
Looking to the south-east Asia, Malaysia represents the most efficient example. Malaysian economy indeed is the best example of a new hybrid economic model which mix some western and islamic characteristic together. Malaysian model is the typical model of double economic regime which show it as not only possible, but really efficient for both financial and commercial sector.
The Malaysian islamic model could boost during the decade 1991-2001 when this new model has imposed itself as innovative, bringing new basis to domestic economy development. Surprisingly, the islamic model could fit into a globalized economic system, mostly thanks to the financial deregulations which have allowed the creation of new financial products.
Internationally speaking, from 1976 the Islamic economy started to be coordinate by some international institutions such as the Islamic Development Bank, which counts 43 members and could be a perfect example to clarify Islamic banks’ cooperation. Mostly in relation with foreign trade and commerce in network with the most important nationals’ credit institutions: 71.1% of the investments granted by IBD were based on murabaha; leasing have contributed for the 10.7%; while loans with services bills’ commission for 10.3%; finally mudaraba is present with 0.19%.
The Islamic economy today
While in the case of Egypt oligarchy and corruption had brought the Islamic model to upgrade the so called ‘borghesia compradora’ hence a corrupted middle class with privileged network with the politic power, as Samir Amin has stated; the case of Malaysia has shown how this model can join the traditional capitalistic economies, improving them. Therefore if a common bank would be organized as a guarantee society: the members would bring the goodwill capital, then – following the schemes analyzed before- the credit institution activities would focus on gaining money through mudaraba contracts and so to subsidize loans. Mudaraba contracts would bring back to the banks a profit in the amount of the shared percentage which must be agreed before the signature, finally, the left over income will be dived into deposits and capitals proportionally. Shareholders’ benefits would be hold by the bank as part of the profit. In that case the project would fail, the bank would gain the loaned amount through deposits, as deal at the moment of the signature of the contract.
This system represent the main difference between the traditional and the islamic bank, indeed, this kind of economic contracts allowed the islamic credit institution to do not task for the interest rate rather prefer to be one of the main actor on the contract with a profit-loss sharing agreement. It is also true that, if from one hand this model entail conspicuous financial beneficiary duty which are variable according to the project success; from the other hand this mechanism could bring the investment to finance modernization area. This is another breaking point with the time-honored system, breaking down the asymmetry between interest rate and profit mark up uncertainty, typical of the western economies. Double Mudaraba contract could be seen as the solution for the economic instability because it create a strong network between deposits and investments which involve both the economic and the social sphere. This way the bank play a double role -financier-entrepreneur- where the target would be the profit mark up of the project. This approach do not just limit the possibility of bankruptcy or failure, but even in that case of loss, consider the loss as shared within the three parties in the contract: employer, banks and depositors.
Malaysian successful example draw the most dynamic worlds’ economies attention, indeed, as stated by Moody rating agency: Saudi Arabia and Malaysia will continue to led the islamic financial markets, ruling on the sukuk (Islamic bond) market while Turkey and Indonesia, on a long run level of analysis would become other two reference points for the Islamic financial markets. Moreover, Moody’s long run analysis forecast has presumed that the highest islamic bonds volume will remain along the Gulf Council Cooperation (GCC) area where islamic financial resources go from 10% in the Emirates to 50% in Saudi Arabia. The annual global sukuk emission grew up from $ 3,3 billion in 2002 to $ 81 billion in 2012. According to Moody’s, real estate sector has been the most profitable among all islamic financial services, while from the governance side, the most important results was reached with the International sukuk standardizations. This two points together allowed the islamic financial markets to grow of the 28% in the 2012.
As stated by Ashar Nazım, Global Islamic Banking economic analyst and Ernest & Young partner, the Islamic finance had recently shown important steps forward also in Turkey, increasing the capital volumes, possible also thanks to a new Turkish financial regulation, even if there still is a long way to go – he concluded. Until the year 2023, the Turkish government has stated that they would reach the 15% of the entire global islamic financial markets, and it means an amount of $ 200 billion. Through the Istanbul stock Exchange, will those capitals be able to reach European hiccup economies?
In this case follow Mahmud Shaltut (well-known jurist at Azahar) statement, it will depend on the public economic governance and from banks’ attitude to sustain development. Today, over 120 Islamic investments banks born out in about fifty different countries for a total amount of $ 800 billion, while over three hundred Islamic commercial banks are spread all over the world. Standard & Poor’s data had demonstrated that the growing islamic capital flown (increased of 28,6%, from $ 639 billion to $ 822 billion, between 2008 and 2009) do not depends just on those countries which have adopted the Islamic structure also into both public and social institutions, such as Iran or Pakistan. In Turkey, for example this new model is led by the private sector. This way, the other sixty five countries allowed to offer islamic services through the intermediation system. Follow this theory, Islamic model widespread could be thwarted just by monetary, fiscal or direct foreign investment restrictive control.